Americans' 'love affair' with the stock market is stronger than ever

• US households and nonprofits have quadrupled equity allocations over the past 40 years to a near-record high of 41%.
• Americans' "love affair" with stocks has pushed multiples up 20 percentage points relative to overseas markets.

There's not a lot that can dent Americans' love for stocks it seems.

According to JPMorgan strategists Jan Loeys and Alexander Wise, US households and non profits have steadily ramped up stock buying over the last four decades, with allocations to US equities hitting a near-record of 41% this year. That's a stark contrast with the rest of the world, and it is a factor that has helped the US stock market put up big growth numbers in that timeframe.

"Together with superior earnings growth, this has propelled the US equity market to the strongest in the world over those decades to a point it is now 64% of world capitalization," the analysts wrote in a note published this week.

What JPMorgan calls Americans' "love affair" with the stock market has pushed multiples up 20 percentage points compared to the rest of the world, contributing to half of the 5.1% annual outperformance of US equities since 1987, and creating the paradigm of "US Exceptionalism," they said.

While a 41% allocation seems unremarkable relative to the classic 60/40 equity-bond allocation recommended by many financial advisors, it reflects a consistent growth pattern since US households' allocations to stocks hit a low of 10% in the early 1980s. That growth has exceeded many counterparts in other developed countries, according to the strategists.

"Households in Japan, Germany, and France have not increased their equity allocations over the past 30-40 years, unlike their US counterparts. Japan and Germany households have only 13% and 16%, respectively, invested in stocks, with France at 26%."

The wealthiest 5% of US households poured even more cash into the stock market, allocating 57% of their investments to stocks, 8% to cash, and 23% to fixed income, primarily corporate and municipal bonds. Boiled down to stocks and bonds, these households had a 70/30 portfolio split at the end of 2018.

JPMorgan noted that several factors have driven a strong "equity culture" in the US. The first is an acceptance among the public that equity returns are generally high, about 10.8% per annum, making investors likely to stick with the market rather than sell into a rally.

"One possibility, contrary to how we all like to think of strategic asset allocation, is that end investors may not really have a strong view, or even a vague one, on how much they want to allocate to different asset classes and simply 'go with the flow'," Loeys and Wise said.

The note added that other factors have contributed to the love of stocks, including investors' perception of lower risks to US equities compared to anywhere else, the popularity of investing books like Jeremy Siegel's "Stocks for the Long Run," and improved equity trading conditions fueled by the proliferation of funds that track different parts of the market.

However, the love affair might not last forever.

The analysts warned that investors could part ways with their stock holdings if they set future expectations too high or if a strong alternative to equities comes along, and they predict there will be less money flowing into equities in the next five years.

Meanwhile, macroeconomic uncertainties and fiscal policies come into play. It's worth noting that an aging population suggests Americans should gradually shift from equities to holding more in cash and bonds over time, though the analysts say such a move isn't imminent.